Anadys: Too Early for HCV Drug

Highlights include Anadys Pharmaceuticals Inc. (ANDS - Snapshot Report), Roche Holding AG (RHHBY), Schering-Plough (SGP), Gilead Sciences (GILD - Analyst Report), Vertex Pharmaceuticals (VTRX) and Valeant Pharmaceuticals International (VRX - Snapshot Report).

Strong efficacy data observed in early phase Ib studies for ANA598, but a severe rash raises safety concerns

ANA598 is Anadys’ (ANDS - Snapshot Report) lead anti-HCV (hepatitis C Virus) drug candidate currently under phase I studies. The company’s share price got a boost recently on its strong efficacy data from a phase Ib study.

Anadys presented the final antiviral and safety data from all three dose levels (200, 400 and 800 mg bid) at the 44th annual meeting of the European Association for the Study of the Liver (EASL) on April 23, 2009. The trial enrolled total 35 subjects. ANA598 treatment resulted in rapid and sustained reductions in HCV RNA with median reductions at end of treatment (day 4) exceeding 2 log10 (>99%) at all dose levels.

At 200 mg bid, the median viral load reduction was 2.4 log10 (range of 0.4 to 3.4); at 400 mg bid, 2.3 log10 (range of 1.6 to 3.5); and at 800 mg bid, 2.9 log10 (range of 2.2 to 3.4). Genotype 1a patients demonstrated median reductions of 1.4 log10, 1.8 log10, and 2.5 log10 at 200, 400 and 800 mg bid, respectively. Genotype 1b patients demonstrated median reductions of 2.6 log10, 2.5 log10 and 3.2 log10, at 200, 400 and 800 mg bid, respectively. Genotype 1b is the most common subtype of hepatitis C found in North America and Europe.

No patient showed evidence of viral rebound while on ANA598. The drug seemed well-tolerated in this short-term study and there were no serious adverse events reported.

However, later in a separate study from healthy volunteers in a 14-day study conducted to extend the safety and pharmacokinetic profile of ANA598, a severe rash was observed in some ANA598 treated subjects. Thirty subjects participated in the study, with eight subjects receiving ANA598 and two subjects receiving placebo at each dose level (400 mg once-daily, 800 mg once-daily and 600 mg bid).

Preliminary results from the study suggested that ANA598 was generally well-tolerated in all cohorts with no serious adverse events, but three subjects (two subjects in the 800 mg once-daily cohort and one subject in the 600 mg bid cohort) developed grade II rash and discontinued treatment after either six or seven days of consecutive dosing.

Competition is fierce in anti-HCV market

Although ANA598 showed encouraging efficacy, this was only conducted in an early phase I trial with a very small number of patients. We remind investors that competition will be fierce in the anti-HCV market.

HCV is a serious infection afflicting about 3.2 million people in the U.S. and approximately 170 million people worldwide -- fatal in some cases -- and is the primary cause of liver transplants in the U.S. and Europe. This market is currently dominated by two players: Roche (RHHBY), which commands a majority of the U.S. and global pegylated interferon market share through the sale of Pegasys/Copegus, and Schering-Plough (SGP), through the sale of Peg-Intron / Rebetrol. The global HCV market in 2008 was between $2 and $3 billion and is expected to grow to $4.4 billion in 2010 and $8.8 billion in 2015.

Due to the asymptomatic nature of HCV infection, it often goes undetected for up to 20 years following the initial infection. Each year, 8,000 to 10,000 people in the U.S. die from complications of HCV. The current standard of care is a combination of pegylated interferon and ribavirin.

Even if Anadys is able to bring ANA598 to the market, it will face tough competition from other big players like Schering Plough, Roche, and Gilead (GILD - Analyst Report) in the HCV market. In addition, a number of companies are developing oral formulations for the treatment of HCV.

Vertex (VTRX) has set a new benchmark for the treatment of HCV. Its HCV candidate, Telaprevir, demonstrated significant reduction in viral load with 4.4-log reduction in viral load compared to 1-2 log reduction seen in other standard of care interferon therapy.

We believe that this data sets the bar very high, and we are unsure whether Anadys can reach it. Currently, Telaprevir is undergoing phase III studies. Valeant’s (VRX - Snapshot Report) Taribavirin (previously known as Viramidine) is in advanced clinical development.

Meanwhile, Schering’s Boceprevir is in phase III. Hence, they are already ahead of Anadys in terms of development. So we believe competition will remain a challenge for Anadys in the years to come.

Cash burn is a matter of concern
    
The company is still in the development stage, with no products on the market.

Net cash burn in the first quarter of 2009 was $7.1 million. The company had only $21 million in cash, cash equivalents and investment as of March 31, 2009, which should last for about three quarters, according to our model. Anadys, therefore, needs to enter into an agreement on a partnership or acquisition relatively quickly otherwise it will have to raise additional cash to fund its operations in 2009.

Currently all eyes are on the ANA598 data and potential partnership agreement the company may enter into in the near future. We are happy to see the very positive efficacy data in the phase Ib trial, but are concerned about the severe rash side effect. Since the phase I trial is only tested in a small number of subjects, we remain skeptical if the company can find a partner with favorable terms.